Can Anything Stop The Current Bull Run In Oil?

U.S. West Texas Intermediate crude oil futures continued to move higher on Friday with last February's high at $53.60 well within reach. Investors continue to look beyond rising coronavirus cases, instead choosing to focus on the prospect of lower supply after Saudi Arabia pledged to cut output in February and March. Also underpinning the crude oil market is this week's reported drawdown in U.S. crude stockpiles although one could argue that a spike in gasoline supply may have been offsetting news.

"The surprise Saudi cut is keeping bulls at the helm of the energy complex," said Stephen Brennock of oil broker PVM. "It will take a brave man to bet against the current bullish run of play."

Oil Prices Underpinned After Saudi Arabia Announces Voluntary Production Cut

Oil prices continue to rise in response to Saudi Arabia's decision to make a big voluntary production cut.

Saudi Arabia, the world's biggest oil exporter, said earlier in the week it would make additional, voluntary oil output cuts of 1 million barrels per day (bpd) in February and March, after a meeting of OPEC+, which groups the Organization of the Petroleum Exporting Countries and other producers, including Russia.

OPEC+ agreed most producers would hold output steady in February and March while allowing Russia and Kazakhstan to raise output by a modest 75,000 bpd in February and a further 75,000 bpd in March.

US Energy Information Administration Weekly Inventories Report

U.S. crude oil stockpiles fell sharply last week while fuel inventories rose, the Energy Information Administration (EIA) said on Wednesday.

Crude inventories fell by 8 million barrels in the week to January 1 to 485.5 million barrels, their biggest decline since August, exceeding analysts' expectations in a Reuters poll for a 2.1 million-barrel drop. The drawdown in stocks in typical for the end of the year, when energy companies take barrels out of storage to avoid hefty tax bills.

U.S. gasoline stocks rose by 4.5 million barrels last week, the biggest increase since April, the EIA said, ahead of expectations for a 1.5 million-barrel rise.

Distillate stockpiles, which include diesel and heating oil, rose by 6.4 million barrels, versus expectations for a 2.3 million-barrel rise.

Coronavirus Cases Rising Globally Triggering Fresh Lockdowns

The pandemic claimed its highest U.S. death toll yet, killing more than 4,000 people in a single day, while China reported the biggest rise in daily cases in more than five months and Japan may extend a state of emergency beyond the greater Tokyo region, according to Reuters.

UK Prime Minister Boris Johnson reimposed a lockdown in England on Monday as a more transmissible variant of COVID-19 fuels a surge in infections and hospitalization in the country.

Meanwhile, a "soft" state of emergency has been declared in Tokyo and three surrounding districts as authorities tackle rising COVID-19 cases.

Weekly Technical Analysis

Weekly February WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. The trade through $49.43 reaffirmed the uptrend. A move through $34.50 will change the main trend to down so the trend is safe for now, but still vulnerable to a reversal top or short-term correction because of overbought conditions.

The main range is $57.58 to $27.22. Its retracement zone at $46.04 to $42.45 is controlling the longer-term direction of the market. Crude oil is currently trading on the bullish side of this retracement zone. This is helping to generate some of the upside momentum.  

Weekly Technical Forecast

We're looking for the strong upside momentum to continue with a major decision coming following a test of the February 20, 2020 main top at $53.60. We could see sellers on the first test of this level, but it shouldn't be too much of a concern for bullish traders unless the market closes lower for the week. If it does then look for the start of a 2 to 3 week correction.

Bullish Scenario

A sustained move over $46.04 will indicate the presence of buyers. With the upside momentum strengthening following the breakout over $49.43, the market remains on a path toward the February 20, 2020 main top at $53.60.

Bearish Scenario

The inability to overcome $53.60 or a lower close next week will signal the buying is getting weaker or the selling pressure is getting stronger. The only way to stop upside momentum is with a shift in momentum to the downside. The best sign of this taking place will be a higher-high then a lower close.

Short-Term Outlook

The move by Saudi Arabia could keep oil prices propped up until February, but at some point prices will become overextended as the focus shifts toward slower demand for gasoline and other fuels in the United States and other parts of the world due to wider restrictions to contain the spreading COVID-19 pandemic.

Severe mobility restrictions around the world to contain a surge in COVID-19 cases still weighed on fuel sales, weakening the prospect of energy demand recovery in the first half of 2021.

The demand numbers are bearish, which tells me that speculators are bolstering crude oil prices. They have placed a big bet on the vaccines stemming the surge in the virus and putting the global economy back on a path toward a speeding recovery.

Nonetheless, oil prices are ripe for a correction in coming weeks, if speculator-driven rallies are not backed by stronger fuel demand soon.

This is not going to crash prices but return them to more reasonable levels. OPEC+ can always cut production further to offset lower demand. Because of this investors will be looking to buy on any weakness because they believe that OPEC+ is their safety net and has their backs.